At first blush, selling a business for a lot more than a proper valuation sounds like a really good thing for a seller, perhaps bad for the buyer, and neutral for the broker. But is this all true?

In the last blog entry there was discussion of the impact of a higher-than-value for sellers.

For buyers it seems much clearer that the higher price can be detrimental.  Making  higher payments is more difficult with the same cash flow, thus meaning that the take home pay for the owner could be less than makes sense for the work done.  Perhaps there is too little cash for investment into improvements, paying proper wages, etc.

However, for the buyer who understands the business and how to operate it, taking it to the next generation, the somewhat inflated purchase price, one that gets the business into her hands for proper expansion may be worth it.  Be cautious with this optimistic purchase however, it could not pan out the way  the buyer hopes.  She is then left with the commitment to the owner in spite of the growth performance.

Buyers need to carefully perform due diligence to understand the true value of the business, not count on cash transactions quoted by the owner but not demonstrated in tax returns,  understand business valuations and know the industry well enough.

This article addresses some of the issues a buyer can consider in evaluating the value of the business, and the considerations a broker should make in valutions:

Valuation Considerations